When creating physical products, one of the most important predictors of success is to price them properly. Part art and part science, finding the right pricing strategy for your products can be difficult.
"It's probably the toughest thing there is to do," Charles Toftoy, associate professor of management science at George Washington University, told Inc. Magazine.
A good pricing strategy aligns with your business goals, tracks your competition, finds the right product balance, and most importantly — understands your target customer. Here are four ways to create pricing strategies that maximize your business profits and success.
1. Know Your Goal
Before you can set a price, you need to clearly define your end goal, according to Dennis Najjar, co-founder of AccountingDepartment.com. Are you looking to capture market share, be known for quality, or set your business apart as the budget-friendly option? Different pricing strategies exist for each goal.
Pricing your product to capture market share, for example, often lures customers away from competitors with lower prices on goods and services. Businesses that want to set themselves apart by offering quality products, on the other hand, can often charge higher prices – if they can justify why their product is worth the extra cost. Understanding your long-term business goal is critical to choosing the right pricing strategy to grow your business.
2. Track Your Competitors
Understanding how your competitors price their products is a great starting point for pricing your own. But you also need to understand whether your product has the same perceived value, according to Intuit. If customers see that your product has a greater value, whether you offer more features, an extended warranty, or expert service, they will likely be willing to pay more. The more you can set your product apart, the more freedom you will have to price your products without being constrained by the competition.
Check out customer reviews to get a sense of how your product compares to others in your market, or do a customer survey to find out. You can also do your own comparison shopping to help you know where you stand. Be careful to compare products that are sold in the same geographic area in order to account for regional price differences.
3. Find The Right Balance
Just as customers won't buy products that are priced too high, your business can't afford to set prices too low to cover your production, marketing, distribution and other costs. First, calculate the cost of creating your product from manufacturing to shipping, including overhead costs like rent. Then you can determine the average cost per product to understand how much you will need to earn to cover your expenses.
Next, decide what profit percentage you hope to earn and set your prices accordingly. If you charge too little, customers may associate the price with the value of your product and consider it "cheap," which can make it hard to grow your business. If you charge too much, you may lose customers to your competition.
4. Identify Your Target Customer
Perhaps the most important factor in setting a price for your product is to know everything you can about your target customers. How do they identify themselves? What do they value? What are their shopping behaviors? How important is your product or service to their lifestyles?
Solid market research can help you better understand the demographics of your target customers and create market segments that allow you to price your products appropriately. Third-party market research firms can help you with this task, or you can group customers yourself according to how they use and value your product. Then target the segment that fits your business best.
Remember to set your price higher than your costs, and to include profits in your calculations. Add in your knowledge of your competitors and your target shoppers and you can set a price for your product that helps you maximize profit while creating the best value for your customers.